G20 leaders: Now is not the time for complacency

WASHINGTON (MarketWatch) -- Even though the world's economies are moving toward recovery from crisis, the leaders of the Group of 20 nations vowed not to become complacent and said they would tackle the big issues that have always bedeviled them in the past.

The leaders pledged to avoid any "premature withdrawal" of stimulus plans.

Preparatory work could continue to craft steps to move to tighter fiscal and monetary policies, to be rolled out "when the time is right."

Wrapping up their summit in Pittsburgh, the leaders devoted much of their meeting to oversight of the banking sector, and they agreed that no bank executives should be rewarded for taking "excessive" risks.

They also pledged to make sure that banks have enough money to survive sudden downturns in financial markets.

For the first time, the leaders agreed to phase out fossil-fuel subsidies. They did not set a deadline, but environmental groups welcomed the statement as a first step.

The G20 also agreed on a U.S. plan to set out common goals to make sure that global growth isn't lopsided. The International Monetary Fund would seek to be an impartial referee in the process.

Efforts to cooperate on international economic policies have floundered in the past, as country leaders are often loath to take steps that will cause pain to important domestic constituencies.

At the moment, China, Germany and Japan rely too much on exports to the United States for growth. In turn, U.S. consumers spend too much of their incomes.

Experts said that there must be some teeth to the peer-review process. Countries in violation of the common goals might, for example, be subject to World Trade Organization sanctions.

The leaders once again stopped short of delving into the tricky specifics of reforms, where past efforts have waned, and set out a timetable for work that lasts months and years in the future.

"Whether we can get an agreement on the specifics of course, remains the key issue," said Eswar Prasad, a professor at Cornell University, in a televised interview.

For instance, new bank-capital standards won't be agreed upon until the end of 2010 and then would be implemented over the next two years.

"That's an eternity in today's financial markets," said Simon Johnson, a professor of finance at MIT.

The plan on common economic goals also will need a further meeting of finance ministers and central-bank governors in November before the proposal gets off the ground.

On the contentious issue of government oversight of pay for bank executives, the G20 stuck to the high ground of limiting irresponsible risk and transparency where there is widespread agreement.

Their joint statement, however, didn't mention any caps on compensation.

Technically on bank pay, the leaders endorsed the recommendation of the Financial Stability Board -- an international regulatory body that said banks should pay bonuses relative to how much capital the firms have on hand.

The FSB also recommended that bonuses could be "clawed back" if the bank suffers losses. In addition, a majority of executive compensation should be long term in nature.

The G20 said they will meet twice in 2010 and then scale back to annual meetings.

President Barack Obama held a press conference at the end of the summit that was dominated by a revelation earlier Friday that U.S. intelligence had uncovered a secret Iranian nuclear facility.

Obama said that Iran now faces a stark choice on Oct. 1: agree to cooperate or face further sanctions.

The G20 is made up of 19 leading nations and the European Union, and accounts for 85% of the world's economy.

'Premier forum'

The G20 took credit for pulling the global economy back from the brink. Johnson of MIT said he was worried that the G20 was "resting on their laurels."

"On the kind of measures you think you would need to prevent a crisis ... I'm afraid what you got from Pittsburgh were empty words," he added.

So pleased were the leaders with their work, they said they had decided to make the G20 the "premier forum" for international economic cooperation.

Already this year, the G20 had in practice supplanted the G8, as fast-growing and creditor nations like China and India that aren't G8 members are now key to any deal on spending, regulation or currencies.

Obama said the protests against the summit in Pittsburgh were gentle compared with those at past gatherings. "Many of the protests are just directed generically against capitalism. I fundamentally disagree with the view that the free market is the source of all ills," he commented.

Prasad said one "game changer' from the Pittsburgh summit was that the United States was going to take the IMF more seriously. The G20 did agree to give emerging-market economies more clout at the IMF.

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